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Transcript of NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE … · NEW YORK CITY TAX APPEALS TRIBUNAL...
NEW YORK CITY TAX APPEALS TRIBUNALADMINISTRATIVE LAW JUDGE DIVISION
::
In the Matter of the Petition : DETERMINATION:
Of : TAT(H) 13-25(RP):
GKK 2 Herald LLC ::
___________________________________:
Gallancy-Wininger, A.L.J.:
Petitioner, GKK2 Herald LLC, a Delaware limited liability
company, having an address c/o Gramercy Capital Corp., 420
Lexington Avenue, 19 Floor, New York, New York 10170, filed ath
Petition for Hearing (Petition) with the New York City (City) Tax
Appeals Tribunal (Tribunal) seeking a redetermination of a tax
deficiency of Real Property Transfer Tax (RPTT) under Chapter 21
of Title 11 of the City Administrative Code (Administrative Code),
asserted in a Notice of Determination dated December 21, 2012
(Notice of Determination), in the amount of $3,392,627.12
consisting of principal of $2,923,593.75 and interest of
$469,033.37 calculated to January 3, 2013. Petitioner requested a
Conciliation Conference before Respondent’s Conciliation Bureau.
Petitioner disagreed with the Conciliator’s Proposed Resolution
and, on June 11, 2013, Respondent issued a Conciliation
Determination discontinuing the matter. The Petition protests the
Conciliation Determination.
Petitioner appeared by Thomas P. McGovern, Esq., Irwin M.
Slomka, Esq. and Kara M. Kraman, Esq. of Morrison & Foerster LLP.
The Commissioner of Finance (Respondent) was represented by Amy
Bassett, Esq., Assistant Corporation Counsel.
Petitioner and Respondent executed and submitted a Consent to
Proceed on a Stipulated Record dated June 11, 2014 pursuant to § 1-
09 (f) of the Rules of Practice and Procedure of the Tribunal
together with a Stipulation (Stipulation) as to certain facts and
documents, including various Exhibits. Petitioner submitted its
Opening Brief on August 1, 2014. Respondent submitted a Brief on
September 22, 2014. Petitioner submitted a Reply Brief on October
21, 2014 and Respondent submitted a Reply Brief on November 21,
2014.
ISSUE
Whether Petitioner GKK2 Herald LLC’s December 22, 2010
transfer of its 45% tenancy-in-common (TIC) fee interest (TIC
Interest) in real property consisting of land located at 2 Herald
Square, New York, New York (Land or Property) in exchange for a 45%
membership interest (Membership Interest) in 2 Herald Owner LLC
(Herald), and Petitioner’s sale, on the same date, of the
Membership Interest in Herald to SLG 2 Herald LLC (SLG), is taxable
for RPTT purposes (Transactions).
Whether the step transaction doctrine may be applied to an
analysis of the Transactions.
FINDINGS OF FACT
Petitioner, SLG, and 1328 Broadway Owners LLC entered into an
Agreement of Sale dated April 9, 2007.
By deeds dated April 9, 2007, Petitioner acquired a 45% TIC
Interest and SLG acquired a 55% TIC Interest in the Property.
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Petitioner and SLG, as lessors, entered into a ground lease
dated April 9, 2007, with Sitt 2 Herald LLC, as lessee (Ground
Lease).1
Petitioner and SLG entered into a Tenants In Common Agreement
dated April 9, 2007 (TIC Agreement), which governed their
respective rights and obligations as to the Land. The record is2
silent as to the specific terms of the TIC Agreement.
In December of 2010, Petitioner and SLG entered into the
following agreements and transactions:
Herald, a Delaware limited liability company, was formed on
December 14, 2010.
On December 22, 2010:
(a) Petitioner and SLG executed a TIC Contribution Agreement
pursuant to which Petitioner and SLG each agreed to contribute
to Herald their TIC Interests together with their respective
interests in the Ground Lease in exchange for, in the case of
Petitioner, a 45% Membership Interest in Herald and, in the
case of SLG, a 55% Membership Interest in Herald.3
The Ground Lease was amended as of June 30, 2007 to reflect its1
assignment to 1328 Broadway Owners LLC, as lessee.
TIC Contribution Agreement, exhibit H at 1.2
Gramercy Capital Corp., Petitioner’s parent, joined in the execution of3
the TIC Contribution Agreement solely with respect to (i) certain limitedrepresentations and warranties, and (ii) an indemnity in favor of SLG andHerald with respect to transfer taxes payable by either SLG or Herald inconnection with the transactions under such agreement. (TIC ContributionAgreement, exhibit H, ¶ 12.16.)
-3-
(1) The TIC Contribution Agreement contained a number of
provisions that reflect the intended sale by Petitioner
to SLG of its new Membership Interest. For example, as
a condition to closing under the TIC Contribution
Agreement, Petitioner was to be released from, and Herald
was to assume, the obligations under mortgage loan
documents relative to a mortgage in the amount of
$191,250,000 (Mortgage) from Goldman Sachs Commercial
Mortgage Capital, L.P., (Mortgagee). 4
(2) A prerequisite to SLG’s obligation to close under the TIC
Contribution Agreement was the issuance of an irrevocable
commitment by a title insurance company to issue a
specific title insurance policy, insuring Herald’s
marketable fee simple title to the land as of the closing
date, subject only to certain permitted title exceptions.
Although Herald is the entity to which both Petitioner’s
TIC Interest and SLG’s TIC Interest were to be conveyed,
under the TIC Contribution Agreement only the conveyance
by Petitioner (and not the conveyance by SLG) had to
satisfy certain title requirements. SLG had the right to
either terminate the TIC Contribution Agreement or
“cause” Herald to accept title subject to the title
exceptions. Although Herald was to be the grantee,
Herald had no independent right to terminate the
agreement if title was unsatisfactory. 5
(3) Although both Petitioner and SLG were grantors of their
respective TIC Interests, under the TIC Contribution
Guarantors and indemnitors were also to be released by the Mortgagee. 4
However, Petitioner remained liable for certain retained obligations.
TIC Contribution Agreement, exhibit H,¶ 5.2.5
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Agreement, Petitioner alone assumed responsibility for
the payment of any transfer taxes arising under the TIC
Contribution Agreement. Petitioner’s parent, Gramercy
Capital Corp., agreed to indemnify, defend and hold SLG
and Herald harmless from such transfer taxes.6
(4) Only SLG (and neither Petitioner nor Herald), had a
limited right to cancel the TIC Contribution Agreement in
the case of condemnation proceedings. Additionally, the7
TIC Contribution Agreement contained several
representations made by Petitioner to SLG but not to
Herald, the intended grantee. 8
(5) The TIC Contribution Agreement also provided that both a
letter of credit given by Petitioner to the Mortgagee and
collateral for the letter of credit were to be returned
to Petitioner. SLG was required to deliver a replacement
letter of credit to the Mortgagee.
(6) The TIC Contribution Agreement further provided that if
the transactions under such agreement were not
consummated as a result of Petitioner’s default, SLG
would have the right to cancel the agreement; if the
transactions were not consummated as a result of SLG’s
default, Petitioner would have the right to cancel the
TIC Contribution Agreement, exhibit H, ¶ 12.16.6
TIC Contribution Agreement, exhibit H, ¶ 7.1.7
These representations by Petitioner included (i) there were no8
outstanding purchase options in favor of another party, and (ii) Petitionerowns and has good title to its TIC Interest. SLG did not make analogous
representations.
-5-
agreement. Herald, the intended grantee under the TIC
Contribution Agreement, did not have a similar right. 9
(7) SLG acknowledged that Petitioner did not make any
representations that were not contained in the TIC
Contribution Agreement. The TIC Contribution Agreement
did not include analogous acknowledgments by either
Petitioner or Herald. 10
(b) Petitioner and SLG each executed deeds conveying their
TIC Interests to Herald in exchange for their respective 45%
and 55% Membership Interests in Herald.
(c) Petitioner and SLG executed and delivered City RPTT
returns reporting that the transfer to Herald was exempt as a
mere change of identity or form of ownership.
(d) Pursuant to the TIC Contribution Agreement, Herald assumed
the Mortgage, the Ground Lease and a management agreement with
SL Green Management Corp. as manager.
(e) Petitioner and SLG, each as members (Members) and two
independent non-member managers executed the Limited Liability
Company Agreement of Herald (Operating Agreement). The
Operating Agreement provides, among other things, that “the
[a]vailable cash flow of the LLC shall be distributed . . .
as the Members shall jointly determine in their sole
discretion.” (Operating Agreement § 3.4.1).
TIC Contribution Agreement, exhibit H, ¶ 9.2.9
TIC Contribution Agreement, exhibit H, ¶ 10.1.10
-6-
(f) Petitioner and SLG executed a Membership Interest Purchase
Agreement pursuant to which Petitioner agreed to sell and SLG
agreed to purchase Petitioner’s Membership Interest for
$25,312,500. The recitals in the Membership Interest Purchase
Agreement include the following:
WHEREAS, immediately following the formationof the Company [Herald] and the execution anddelivery of the Operating Agreement, theCompany intends to acquire the Land (definedbelow); and
WHEREAS, subject to the terms hereof, Seller§desires to sell the Petitioner’s MembershipInterest and Purchaser desires to purchase thePetitioner’s Membership Interest in accordancewith the terms hereof.
(g) Petitioner and SLG executed an Assignment and Assumption
Agreement whereby Petitioner assigned its Membership Interest
to SLG. The Assignment and Assumption Agreement provided for
Petitioner’s withdrawal as a member of Herald simultaneously
with Petitioner’s execution of such agreement. 11
(h) Petitioner filed an RPTT return which describes the
condition of the transfer of its Membership Interest to SLG as
“Other. Transfer of 45% interest in LLC” and reports that no
RPTT is due.
Respondent commenced an audit in this matter. Beginning in
March, 2012, the auditor requested information from Petitioner and
SLG. Respondent’s audit file and Respondent’s tax return file
include copies of: (i) correspondence from Petitioner explaining
its position that the Transactions are not taxable; (ii) the April
9, 2007 deed between 2 Herald Holding LLC, as grantor and SLG and
Exhibit M,§ 5.11
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Petitioner, as grantees of their respective TIC Interests; (iii)
the TIC Contribution Agreement; (iv) a closing statement; (v) the
Membership Interest Purchase Agreement; (vi) a Grantor Balance
Sheet for Two Herald Square (vii) an Assumption Agreement pursuant
to which Herald assumed the obligations under a promissory note in
the original principal amount of $191,250,000, which note is
secured by the Mortgage; (viii) the deeds and related City and
State transfer tax returns for the transfer from (a) Petitioner to
Herald, conveying its 45% TIC Interest, and (b) SLG to Herald,
conveying SLG’s 55% TIC Interest. Respondent’s tax return file12
also contains the City and State transfer tax returns for the
transfer of Petitioner’s Membership Interest to SLG.
The auditor concludes in the Audit Case Summary that
“ownership of 100% controlling economic interest in real property
by [SLG], resulted in a 55% non-taxable mere change and a 45%
taxable change in beneficial ownership.” The auditor calculated
the taxable consideration of $111,375,000, based on the purchase
price for the GKK Membership Interest of $25,312,500 plus a 45%
pro-rata share of the Mortgage ($191,250,000 x 45% or 86,062,500).
The NOD reflecting consideration in the amount of $111,375,000 was
issued on December 21, 2012.
STATEMENT OF POSITIONS
Petitioner asserts that the transfer of its 45% TIC Interest
in exchange for its 45% Membership Interest is exempt from RPTT as
a mere change in form under Administrative Code § 11-2106 (b)(8)
and its sale of that interest to SLG is exempt from RPTT as a
Respondent’s Audit File, exhibit O.12
-8-
transfer of a non-controlling interest. (See, Administrative Code
§ 11-2101 [7], [8].)
Petitioner also asserts that it has the legal right to
structure the transaction to eliminate taxes to the extent
permitted by law.
In addition, Petitioner asserts that Respondent is not
authorized to apply the step transaction doctrine to the
Transactions and further, any such application is contrary to
Respondent’s regulations. Moreover, Petitioner asserts that the
Transactions do not satisfy either of the two pertinent step
transaction tests, namely the “interdependence test” and the “end
result test.”
Petitioner further asserts that amendments to Respondent’s
Rules did not include (1) the Proposed Rule (19 RCNY) § 23-05 (b)
(8) (iii), and (2) the illustration that follows (Proposed Rule). 13
Petitioner argues that Respondent’s failure to include the Proposed
Rule in its final Rules, is a recognition that “the RPTT statute
did not support [Respondent’s] multi-step transaction position.”
Petitioner also asserts that Respondent’s attempt to tax the
transfer of its Membership Interest is based on a statute imposing
taxes and must be construed in favor of the taxpayer.
The Proposed Rule stated: Application of mere change exemption to13
multi-step transactions. Where pursuant to a plan, a transaction that would beexempt in whole or in part from the tax as a mere change of identity or formof ownership or organization is preceded or followed by one or more othertransactions, all of the transactions pursuant to the plan will be taken intoconsideration in determining the beneficial ownership of the real property oreconomic interest therein prior to the transaction and the extent to which thebeneficial interest therein remains the same following the transaction.
-9-
Respondent asserts that the Transactions are subject to the
step transaction doctrine. Respondent characterizes the relevant
statutes as exemption statutes and asserts that Petitioner has the
burden of proof to establish the applicability of the statutory
exemptions to the Transactions. Respondent further asserts that a
tenancy in common is not an interest in an entity; rather, it is a
direct interest in real property and the mere change exemption is
unavailable. Respondent also asserts that as the mere change
exemption does not apply, the subsequent transfer of Petitioner’s
Membership Interest is not a transfer of a controlling interest.
Accordingly, Respondent argues the Transactions are subject to
RPTT.
CONCLUSIONS OF LAW
Administrative Code § 11-2102 (a) imposes the RPTT on “each
deed at the time of delivery by a grantor to a grantee when the
consideration for the real property and any improvement thereon
(whether or not included in the same deed) exceeds twenty five
thousand dollars.”
Administrative Code § 11-2104 imposes the obligation to pay
the RPTT on the grantor, although the grantee is also liable for
the payment of the RPTT if the amount due is not paid by the
grantor or the grantor is exempt from tax. (Administrative Code §
11-2104.)
Mere Change in Form Exemption
Administrative Code § 11-2106 (b) (8) provides an exemption
from the RPTT where the deed conveying real property “effects a
mere change of identity or form of ownership or organization to the
extent the beneficial ownership of such real property or economic
-10-
interest remains the same . . .” (Emphasis supplied). (Mere Change
Exemption)
The interest held by Petitioner before it transferred its TIC
Interest to Herald was a tenancy in common. The United States
Supreme Court, in US v Craft, (535 US 274, 279, 280 [2002])
described the common law interest of a tenancy in common as
follows:
The common law characterized tenants in commonas each owning a separate fractional share inundivided property. Tenants in common mayeach unilaterally alienate their sharesthrough sale or gift or place encumbrances onthese shares. . . . Tenants in common havemany other rights in the property, includingthe right to use the property, to excludethird parties from it, and to receive aportion of any income produced from it.(Emphasis added. Citations omitted).
A tenancy in common has been described as a:
tenancy whereby each cotenant has an equalright to possess and enjoy all or any portionof the property as if he or she is the soleowner.
(24 NY Jur 2d, Cotenancy and Partition § 3 [accessed January 15,
2015].) Further,
[E]ach tenant [in common], as to his or hershare, is deemed to be the owner of an entireestate, separate and distinct from that of hisor her cotenants, with only a unity ofpossession between them. As between tenantsin common who are united only in their rightto possess real property, however, there isneither privity of title nor union andentirety of interest. (Emphasis supplied.)
-11-
24 NY Jur 2d Cotenancy and Partition § 7 [accessed January 15,
2015].)
Respondent issued several letter rulings that support the
application of the Mere Change Exemption in situations involving
the conveyance of TIC interests or percentage interests in real
property to an entity in which, on the facts specific to the
particular rulings, the beneficial ownership of the property
remains the same after the conveyance as it was before the
conveyance. For example, Finance Letter Ruling (FLR) No. 034806-21
(NY City Dept Fin 2003) states that “[T]he determination of the
beneficial ownership of real property before a transaction and the
extent to which the beneficial interest remains the same following
the transaction, will be based on the facts and circumstances.”14
(See, FLR 97-4700 [NY City Dept Fin 1997]; FLR 95-4651 [NY City
Dept Fin 1996]; FLR 94-4549 [NY City Dept Fin 1995]. See also,
Real Property Transfer Tax (RPTT) Rules of the City of New York (19
RCNY) § 23-05 (b) (8) (ii) Example A, which explains that a
transfer to a corporation by equal tenants in common is exempt from
RPTT because the beneficial ownership of the real property remains
100% the same before and after the transfer.) 15
The term “beneficial interest” has been defined as being more
than a mere financial interest. (Matter of Viacom, Inc., NYS Tax
Appeals Tribunal Decision, [NY St Div of Tax Appeals DTA No.
819591, May 3, 2007], in which a change in voting rights was found
Letter rulings are not precedential but nevertheless illustrate14
Respondent’s position. (See, (16 RCNY) 16-05 [a]).
A State advisory opinion considering the State Real Estate Transfer15
Tax § 1402, distinguishes ownership of a tenancy in common interest, which isa direct interest in real property, from ownership of an interest in anentity. (See, TSB-A-98(2)R, TSB-A-98(12)C, TSB-A-98(2)M, at 6.)
-12-
to be a change in beneficial interest for State Real Estate
Transfer Tax purposes). The State Tax Appeals Tribunal found that,
“[b]eneficial ownership is marked by the command over property and
enjoyment of its economic benefits.” (Viacom, citing, Yelencsics v
Commissioner, 74 TC 1513, citing, Anderson v Commissioner, 164 F2d
870, 48-2 USTC 9109, affg 5 TC 443; Matter of Racal Corp & Decca
Elecs, NYS Tax Appeals Tribunal Decision [NY St Div of Tax Appeals
DTA No.807361, May 13, 1993]; Matter of Shechter, NYS Tax Appeals
Tribunal, [NY St Div of Tax Appeals DTA No. 808585, October 13,
1994]. See also, Macon, Dublin & Savannah R.R. Co. v Commissioner,
40 BTA 1226 [1939].) Other indicia of beneficial ownership include
entitlement to profits, dividends and bonuses. (Yelencsics v
Commissioner, (74 TC 1513 at 1527, 1528, [1980].) In FLR 95-4651,
Respondent ruled, “[i]n the case of a limited liability company, a
member’s beneficial interest is the member’s interest in the
profits, losses, distributions, rights upon dissolution and voting
power in the company.” (Emphasis supplied.) (See also, FLR 97-4700,
supra.)
The record is silent as to any agreement between Petitioner
and SLG regarding their respective interests in the profits,
losses, distributions, rights upon dissolution and voting power
while they operated the Property as tenants in common. Although
Petitioner obtained a 45% membership interest in Herald, the
Operating Agreement did not provide Petitioner with any express
interest in Herald’s available cash flow. Instead, § 3.4.1 of the
Operating Agreement directed that the distribution of available
cash flow be made as the “[m]embers shall jointly determine in
their sole discretion.” Since Petitioner held only a minority
interest in Herald, it is unclear whether Petitioner could have
compelled any distribution. Petitioner has not established that
its Membership Interest is the same beneficial interest with the
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same bundle of rights that Petitioner had when it owned its TIC
interest.
Transfer of a Controlling Economic Interest.
Administrative Code § 11-2102 (b) (1) imposes the RPTT on
transfers of economic interests in real property.
An “economic interest in real property” includes “the
ownership of an interest or interests in a partnership, association
or other unincorporated entity which owns real property . . .”
(Administrative Code § 11-2101 [6].)
Administrative Code § 11-2101 (8) defines the word “transfer”
as follows:
When used in relation to an economic interestin real property, the terms “transfer” or“transferred” shall include the transfer ortransfers or issuance of shares of stock in acorporation, interest or interests in apartnership, association or otherunincorporated entity, or beneficial interestsin a trust, whether made by one or severalpersons, or in one or several relatedtransactions, which shares of stock orinterests constitute a controlling interest insuch corporation, partnership, association,trust or other entity.
A “controlling interest” in a partnership, association, trust
or other non-corporate entity, consists of “fifty percent or more
of the capital, profits or beneficial interest in such partnership,
association, trust or other entity.” (Administrative Code § 11-2101
[8].)
-14-
Petitioner’s reliance on 19 RCNY 23-05 (b) (8) (ii) Example C,
is misplaced. Example C involves the conversion of a general
partnership, comprised of two equal partners, to a limited
liability company, followed by the sale of a non-controlling
interest by one member of that company to the other member.
Example C states that, relative to the mere change exemption, the
issue is whether “under the applicable state law X Company is
considered to be the same entity as before the conversion [in which
case] the conversion will not be considered a transfer of real
property or an economic interest in real property.” Respondent
asserts that Petitioner converted a TIC Interest (rather than a
partnership interest) to a Membership Interest, and therefore, the
entities before and after the transfer are not the same under state
law. However, Respondent has issued several letter rulings that
treat transfers of real property from tenancies in common to
limited liability companies, as non-taxable mere changes in form
where the beneficial interests of the parties to the transfer
remain the same before and after the transfer.(See, FLR 97-4700 [NY
City Dept Fin 1997]; FLR 95-4651 [NY City Dept Fin 1996]; FLR
034806-021, [NY City Dept Fin 2003].) Respondent may not argue
that Example C is inapplicable to this matter merely because a TIC
interest is not the same a partnership interest. Rather, with
respect to the Mere Change Exemption, the question is whether
Petitioner owns the same beneficial interest before and after the
conveyance. Nominally, Petitioner retained the original 45%
interest. Under the Operating Agreement, however, Petitioner had no
clear right to distributions of available cash flow. Petitioner
has failed to establish that the attributes of such interest were
the same both before and after the conversion of its TIC Interest
to its Membership Interest.
-15-
Further, the transfer of a less-than-controlling TIC interest
(i.e., less than 50%) is subject to RPTT. (See, Matter of Dalia
Horowitz, City Tax Appeals Tribunal TAT (H) 96-77 (RP) [City Tax
Appeals Tribunal, August 31, 2001]). Had Petitioner directly16
conveyed its TIC interest to SLG, that conveyance would have been
subject to RPTT.
The Step Transaction Doctrine
The step transaction doctrine has its roots in Gregory v
Helvering (293 US 465 [1934]) (where a taxpayer formed a
corporation solely to receive assets that were distributed to the
taxpayer as a liquidating dividend) and Minnesota Tea v Helvering,
(302 US 609 [1938]), (where the court treated as taxable gain, cash
in the hands of shareholders used to pay corporate debts). Under
the step transaction doctrine,[‘]steps[’] in a series of formally
separate but related transactions [are treated] as a single
transaction if all of the steps are substantially linked.” (Greene
v US, 13 F3d 577, 583 [2 Cir 1994]), (regarding charitablend
donations of futures contracts while the donor retained the right
to certain income.) The purpose of the step transaction doctrine
is “to assure that tax consequences turn on the substance of a
transaction rather than on its form.” (King Enterprises, Inc. v US,
418 F2d 511, 517 [Cl Ct 1969].)
In Crenshaw v US (450 F2d 472 [5 Cir 1971]), the US Court ofth
Appeals for the Fifth Circuit, determined that the subject
transaction was a sale of a partnership interest in real property
rather than a distribution in liquidation. (Crenshaw at 476.) The
Decisions of City Administrative Law Judges may not be cited as16
precedent. They are nevertheless instructive. (See, NY City Charter § 168[d]).
-16-
Court noted that “the substance rather than the form of a
transaction determines its tax consequences, particularly if the
form is merely a convenient device for accomplishing indirectly
what could not have been achieved by the selection of a more
straightforward route.” (Crenshaw at 475.) The Court stated
“[t]ransparent devices totally devoid of any non-tax significance
to the parties cannot pass muster even though a literal reading of
the statutory language might suggest otherwise.” (Crenshaw at 475.)
Further, the Court held that:
[a] corollary proposition, equally wellestablished, is that the tax consequences ofan interrelated series of transactions are notto be determined by viewing each of them inisolation but by considering them together ascomponent parts of an overall plan. [Citationsomitted.] Taken individually-or a few, but notall, steps at a time - each step in thesequence may very well fit neatly into anuntaxed transactional compartment. But theindividual tax significance of each step isirrelevant when, considered as a whole, theyall amount to no more than a singletransaction which in purpose and effect issubject to the given tax consequence.
(Crenshaw at 475.)
In order to determine whether the step transaction doctrine
applies to a particular matter, courts have established two tests:
an ‘interdependence test,’ and an ‘end result test.’ (Security
Industrial Insurance Company v US, 702 F2d 1234 [5 Cir 1983]; Kingth
Enterprises at 516.) Only one test must be satisfied in order17
for the step transaction doctrine to apply. (See, Associated
A ‘binding commitment’ test was enunciated in Commissioner v Gordon,17
391 US 83 [1968]. However, the Court in King noted, that test “has seldombeen applied since.” (King at 1530, n 6).
-17-
Wholesale Grocers, Inc. v US, 927 F2D 1517, 1527-28 [10 Cir 1991],th
which involved loss recognition in a corporate restructuring).
The US Court of Claims in King discussed the two tests as
follows:
The ‘interdependence test’ requires an inquiryas to ‘whether on a reasonable interpretationof objective facts the steps were sointerdependent that the legal relationscreated by one transaction would have beenfruitless without a completion of the series’. . .[Citations omitted.]
andThe ‘end result test’. . .establishes astandard whereby * * * purportedly separatetransactions will be amalgamated into a singletransaction where it appears that they werereally component parts of a single transactionintended from the outset to be taken for thepurpose of reaching the ultimate result.
(King at 516.)
The US Court of Appeals for the Tenth Circuit, in Associated
Wholesale Grocers, citing Kuper v Commissioner, (533 F2d 152, 156,
[5 Cir, 1976]) stated that, “[d]isregarding the tax effects ofth
individual steps under [the interdependence test] is, therefore,
[‘]especially proper where. . . it is unlikely that any one step
would have been undertaken except in contemplation of the other
integrating acts. . . .” (Associated Wholesale Grocers at 1523.)
Petitioner owned a TIC interest from April, 2007 until
December, 2010. Only on December 22, 2010, did Petitioner execute
the TIC Contribution Agreement and convert its TIC Interest to a
Membership Interest. That conversion occurred on the same day that
Petitioner executed the Operating Agreement, the same day it
-18-
executed the Membership Interest Purchase Agreement, and the same
day Petitioner sold its newly created Membership Interest to SLG.
The TIC Contribution Agreement included provisions that
extended beyond the mere exchange of a TIC Interest for a
Membership Interest, addressing matters relating to the conveyance
of real property including: (a) a guaranty by Petitioner and its
parent (but not SLG) of the payment of any transfer taxes arising
out of the transactions (even though both Petitioner and SLG
transferred TIC membership interests to Herald), (b) a release of
Petitioner from its obligations under the Mortgage and the return
of certain collateral, (c) the right of SLG to cause Herald to take
certain actions in the case of title exceptions affecting
Petitioner’s TIC Interest (without providing for rights in favor of
Petitioner or Herald in the case of title issues affecting SLG’s
TIC Interest) and, (d) certain representations made by Petitioner,
without comparable representations from SLG (i.e., that (i) there
were no outstanding purchase options in favor of another party; and
(ii) Petitioner owns and has good title to its TIC Interest).
The Operating Agreement provided that Petitioner’s right to
distributions of available cash was only “as the members shall
determine.” Petitioner’s lack of express rights regarding such
distributions is an indication that the Operating Agreement was
intended to have only a transitory effect on Petitioner. Indeed,
Petitioner withdrew as a Member of Herald simultaneously with its
assignment of its Membership Interest to SLG.
Recitals in the Membership Interest Purchase Agreement
describe a sequence of events consisting of the formation of
Herald, the execution and delivery of the Operating Agreement, the
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acquisition by Herald of the Land and Petitioner’s sale of its
Membership Interest to SLG.
Under these circumstances, it is unlikely that either the
conversion of Petitioner’s TIC Interest to its Membership Interest
or the sale of its Membership Interest would have occurred without
the other. The interdependence test is satisfied under the facts
of this matter.
It is apparent that the events occurring in December, 2010,
were components of one transaction, the end result of which was
intended to achieve the sale by Petitioner of its TIC interest to
SLG while avoiding the payment of RPTT on such transaction and, the
end result test is satisfied.
In Associated Wholesale Grocers, the Court addressed the
question of whether the lack of business purpose is a prerequisite
to the application of the step transaction doctrine, or whether the
presence of a business purpose precludes the application of the
doctrine. The Court stated that “the law is unclear as to the
relationship between the step transaction doctrine and the business
purpose requirement.” (Associated Wholesale Grocers at 1526). It
noted that “[i]n some cases the existence of a business purpose is
considered one factor in determining whether form and substance
coincide. In others, the lack of business purpose is accepted as
a reason to apply the step transaction doctrine.” (Associated
Wholesale Grocers at 1526, 1527.)
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In Revenue Ruling 79-250, the IRS stated,
threshold steps will not be disregarded undera step transaction analysis if suchpreliminary activity results in a permanentalteration of a previous bona fide businessrelationship. Thus the substance of each of aseries of steps will be recognized and thestep transaction doctrine will not apply, ifeach step demonstrates independent economicsignificance, is not subject to attack as asham, and was undertaken for valid businesspurposes and not for the mere avoidance oftaxes.
On the other hand, the Court in Associated Wholesale Grocers
determined that it is not necessary to reach the question of
whether there is an independent business purpose in order for the
step transaction doctrine to apply. (Associated Wholesale Grocers
at 1526, 1527.)
In Greene v US, (13 F3d 577 [2 Cir, 1994]), the US Court ofnd
Appeals for the Second Circuit, citing Penrod v CIR, 88 TC 1415,
stated that, to apply [the independence test], a court must
determine whether the individual steps had “independent
significance or whether they had meaning only as part of a larger
transaction.” (Greene at 584).
Petitioner argues that the Transactions had independent
significance because it was the intention of the parties that
Herald would own the Property and such intention was fulfilled by
Petitioner and SLG conveying their respective TIC Interests to
Herald in exchange for Membership Interests. Further, Petitioner
posits that it was the intention of the parties that SLG would
become the sole owner of Herald, which was accomplished by the sale
of Petitioner’s Membership Interest. Petitioner asserts that if
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the first transaction is disregarded, Herald would not own any
portion of the Property and if the second transaction is
disregarded, Petitioner would continue to own a 45% interest in
Herald. Clearly, in this matter, the individual steps would not
have been undertaken separately and had meaning only as part of a
larger transaction. The application of the step transaction
doctrine in this matter does not result in a fictitious
transaction. It merely treats as one integrated transaction the
transfer by Petitioner of its TIC Interest in exchange for its
Membership Interest and the sale of its Membership Interest to SLG
on the same day.
A second issue relating to the step transaction doctrine,
concerns the extent to which it is permissible for taxpayers to
avail themselves of “planning possibilities.” The Court in
Associated Wholesale Grocers considered Chisholm v Commissioner,
(79 F2d 14, 15 [3 Cir 1935]) and Commissioner v Day & Zimmermann,rd
(151 F2d 517 [3 Cir 1945]). The US Court of Appeals for the Thirdrd
Circuit in Chisholm, considered “whether the transaction under
scrutiny is in fact what it appears to be in form.” The same
Court, in Day & Zimmermann, scrutinized the bona fides of a stock
purchase by the taxpayer’s treasurer, concluding that the
taxpayer’s stock should not be aggregated with that of its
treasurer to determine whether, for loss recognition purposes, the
taxpayer held less than 80% of the corporation’s voting stock.
(See also, Crenshaw at 475, 476.) Based on the facts in this
matter, it does not appear that the Transactions under scrutiny are
in fact what they appear to be in form.
There is nothing in the record to support Petitioner’s
assertion that Respondent’s failure to include the Proposed Rule in
its final Rules, is in recognition that “the RPTT statute does not
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support [Respondent’s] multi-step transaction position.” Such an
inference is speculative at best.
The step transaction doctrine has been invoked in matters
involving the taxation of real property transactions. (See, Matter
of Waterman Investment Company, NYS Tax Appeals Tribunal Decision,
[NY St Div of Tax Appeals DTA No. 813224, August 7,1997] regarding
the transfers of two parcels in exchange for an interest in a
partnership; see also, Matter of Kevin Kelly, NYS Tax Appeals
Tribunal Decision, [NY St Div of Tax Appeals DTA No. 819863, Feb.
1, 2007] holding that the purchase of land and the construction of
a home was one transaction for the purpose of State Tax Law § 1402-
a, the so-called “mansion tax”; Commissioner v Court Holding Co.
(324 US 331 [1945]), involving the sale by shareholders of a
corporation of an apartment house which was the sole corporate
asset, until its distribution to the corporate shareholders as a
liquidating dividend). (See also, Matter of Square Plus Operating
Corp., City Tax Appeals Tribunal TAT No. 90-1221 at 4 [City Tax
Appeals Tribunal, October 29, 1992]; aff’d 212 AD2d 448 [1 Deptst
1995], lv den, 87 NY2d 804 [1995], involving commercial rent tax.)
Respondent does not lack legal authority to apply the step
transaction doctrine. The Court of Appeals, in Matter of Roman
Catholic Diocese of Albany v New York State Department of Health,
(66 NY2d 948 [1985]), agreed with the dissenting opinion of Justice
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Howard A. Levine at the Appellate Division (109 AD2d 140 at 146
[1985]) who stated that:
[T]he general principal of administrative law[is] that an agency is free to evolvestandards, if consistent with the statutoryframework, on a case-by-case basis and applythem to the individual proceeding at hand.[‘]And the choice made between proceeding by ageneral rule or by individual ad hoclitigation is one that lies primarily in theinformed discretion of the administrativeagency.[’] (Securities Comm v Chenery Corp.,332 US 194, 203)
In view of the body of law requiring taxes to be levied on the
substantive transaction rather than on a series of formalized
steps, Grace v State Tax Commission, 37 NY2d 193 (1975) is
inapplicable to save a transaction from the application of the step
transaction doctrine.
ACCORDINGLY, IT IS CONCLUDED THAT Petitioner is liable for the
RPTT asserted in the Notice of Determination, as the Transactions
constitute step transactions and, as such, Petitioner is not
entitled to avail itself of either the Mere Change Exemption under
§ 11-2106 (b) (8) of the Administrative Code or the exclusion
applicable to the sale of a non-controlling interest pursuant to
Administrative Code §§ 11-2101 (7) and (8).
The Petition of GKK 2 Herald LLC is denied and the Notice of
Determination is sustained.
DATED: April 1, 2015 _________________________ New York, New York Jean Gallancy-Wininger
Administrative Law Judge
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